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On the Estimation of Euler Equations in the Presence of a Potential Regime Shift

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Saikkonen, Pentti
Ripatti, Antti

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Abstract

The concept of a peso problem is formalized in terms of a linear Euler equation and a non-linear marginal model describing the dynamics of the exogenous variable driving the process. It is shown that, using a threshold autoregressive model as a marginal model, it is possible to produce time-varying peso premia. A Monte Carlo method and a method based on the numerical solution of integral equations are considered as tools for computing conditional future expectations in the marginal model. A Monte Carlo study illustrates the poor performance of the generalized method of moments estimator in small and even relatively large samples. The poor performance is particularly acute in the presence of a peso problem but is also serious in the simple linear case. Copyright 2000 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 68 (2000)
Issue (Month): 0 (Supplement)
Pages: 92-121
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Handle: RePEc:bla:manchs:v:68:y:2000:i:0:p:92-121

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373. [Downloadable!] (restricted)
  2. Clements, Michael P. & Smith, Jeremy, 1997. "The performance of alternative forecasting methods for SETAR models," International Journal of Forecasting, Elsevier, vol. 13(4), pages 463-475, December. [Downloadable!] (restricted)
  3. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March. [Downloadable!] (restricted)
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  4. Tauchen, George, 1986. "Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained from Financial Market Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(4), pages 397-416, October.
  5. repec:cup:etheor:v:11:y:1995:i:2:p:258-89 is not listed on IDEAS
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  1. Lanne, Markku, 1999. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift," Research Discussion Papers 20/1999, Bank of Finland. [Downloadable!]
    Other versions:
  2. Daniel G. Swaine, 2001. "Are taste and technology parameters stable? a test of "deep" parameter stability in real business cycle models of the U.S. economy," Working Papers 01-05, Federal Reserve Bank of Boston. [Downloadable!]
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